How to determine if oil leasing co is cheating

Oil and Gas Leasing Help
1

Hello,

I am brand new to this website so hope my questions are in accord with the protocol.

My siblings (there are 4 of us) and I have some mineral rights in Bottineau ND that we inherited and that a US company leased from us 3 years ago, but sold to a Canadian firm. We were all complete novices and didn't know to check all the fine print and the meaning of clauses though I got the best advice I could at the time. The initial contract term was for 3 years and now the Canadian firm is attempting to exercise the 2 year renewal option.

This time I began looking deeper at how the royalties are being calculated since even though we were supposed to get 18% royalty they have managed to reduce the actual % down to eg

0.000832101 NRI on one of the wells. And the royalty checks have been quite miniscule.

I emailed the oil company and they emailed me back their calculations. Here is one of them.

The drilling spacing unit of this well is the North Half of Section XX-XX-XX (320 acres) of which you have an interest in the NE/4NE/4, the W/2NE/4 and the N/2NW/4 (combined 200 acres). This works out to a tract factor of 200/320.

According to the title opinion that was received by EOG at the time the well was drilled you each owned a 0.739645% mineral interest.

Each of your leases were signed with an 18% royalty rate.

Tract Factor * Mineral Interest * Royalty Interest = NRI

200/320 * 0.739645% * 18% = 0.000832101 NRI

Speaking to a friend who had been in the oil industry, he seemed to confirm my concerns about being ripped off in at least 2 ways.

1. In the example above they reduce the royalty by about 2/3 by multiplying the 18% times the tract factor (200/320). It seems to me that the 18% should only be mulitplied by the mineral % interest since the 18% should apply to all or any part of the whole 320 acre tract. My friend said that indeed they try to group your tract with others to pay less.

2. In a couple of tracts, (we have three separate tracts in separate sections but all under same lease which I read we shouldn't have done), we own rights in more than one part of the section but they lease only part of our share. But my concern is that they are drilling in one area but if the oil is pooled over all our tracts, then they are in effect taking oil from the unleased section without payment. The woman at the Canadian firm claimed that 1. The ND Industrial Commission approved the spacing and 2. "We don't believe we have drained the well" which sounds like a tacit admission that they are indeed doing what concerns me.

3. How do we know that the mineral interest % they claim is accurate. The current company claims the original company had their attorney determine the amount and that the only way we could verify it would be to hire our own attorney to do so. So my third question is whether these companies might try to cheat in calculating the % since they are hiring their own attorney's to do so-and apparently little or no accountability. I realize the state of ND has theoretical oversight, but I can't imagine their verifying every tract and least. IE How do we know they are using the correct and rightful mineral interest %?

My friend suggested speaking to a banker in the area as he felt they would be most objective. So I did so but he seemed quite non-committal if not a bit evasive. But he suggested hiring an oil and gas attorney to go over our contract. But the thus far limited payments wouldn't justify that expense.

I would appreciate any and all input from folks experienced with this sort of thing, esp in North Dakota regarding my above concerns.

Thanks, God bless

Van

2

I think with a little more information we can get to the bottom of this. What kind of well are we talking about, verticle? If so, you may not have many acres in the pool. It could be a verticle well on 40 acre spacing. You could have a low producing well, one strategy is to drill a handful of cheap wells instead of an expensive horizontal well. An added benefit of the cheap verticle well being that if you drill one or two and they don't look good you can stop, unfortunately, one of these wells would hold your acreage as well as an expensive well if you don't have a pugh clause. I don't want to pry but at this point you can give the location of the well. If you have a producing well, holding all of your acres by production whether all of your acres are in the well pool or not, there isn't anything any outsider could do to affect the business deal you have already made. The more and better information you give the better the information you will get. You do not get 18% of the 320 acres. If you could get 18% of the 120 acres that do not belong to you, what would stop those with the 120 acres from getting a percentage of your 200 acres? I have a sneaking suspicion that there is a logical answer to most of the questions your post has brought up, the oil company could be doing some really ugly things but they may be well within their rights according to the lease contract. At this point there may be nothing more that someone can do to help other than to point out what has happened, how it happened and why it's perfectly legal. I would personally rather know if that is the case. There is a slim chance that you are being cheated but nobody will be able to tell without full information. I would be glad to try to help more if you can give more information. You can send me a friend request so we can private message if you don't want it on the open forum, but I think you could be missing out by not getting others input.

3

I agree with the post above in terms of the incomplete information. Biggest challenge with highly fractionalized interests is the cost of education. Owning a small portion of a poor well works out to be a hobby and nothing more.

4

Hello to all who replied,

Thanks for your replies and apologies for delay in my response.

You all mention needing more info: we have several tracts under lease, and I just gave one above as an example. As mentioned, these are in Bottineau, ND. As indicated, in the above example, we own mineral rights on 200 of the 320 acre tract. However we don't own 100% of mineral rights-we are four siblings and each of us own a mineral 0.739645% interest in that tract. (or together a total mineral interest % of 4 x 0.739645%). I can understand multiplying our % interest times the oil produced whether in volume or $ value. Likewise with the tract factor-but I see no way that multiplying it times the 18% they promised to pay. Further multiplying each of my siblings %share times the 18% rate also reduces our share by another 25% each.That 18% royalty is a promised, set rate which should be multiplied by each persons proportional share of the tract-and multiplying the the tract factor and mineral interest % times production should properly divide up the appropriate proportional share. But I don't see how multiplying those factors by the 18% is justified-unless the NRI is multiplied by the TOTAL production for that tract under question(again as total $ or total volume production)

Also as to your other question-I am not sure but I think it may be a vertical well. But again I don't see any justification for reducing the royalties for a vertical vs horizontal well if they agreed to lease a given tract size. RW I'm not sure what you were saying in your comment on this.

Also you ask about the Pugh clause-not sure but I think we asked for it. How do we determine if that is in contract? How will it be specified?

Also note my question #2 above regarding if they lease one portion of a tract we own, but don't lease the adjacent part, and are drilling on the one leased, but drawing oil from the reservoir underneath both sections, that is to me taking what they didn't pay for. The current oil companies response to me on this was, "we don't think we are draining the well" which seems to be a tacit admission that they are pumping oil from tracts they didn't pay royalties for.

Also, can you answer my question # 3 above, re how we know that the oil companies claims of our mineral interest % is correct? Other than hiring our own attorney to check the records which isn't feasible? now after the fact of hearing how very careful one has to be with these oil companies and know what you are doing (which we didn't when we signed) as they can pull all sorts of tricks, to be honest I am getting quite upset with the whole process. Re the mineral interest, Brandon, I assume you were addressing that in your speaking of checking original deeds, probate or will-I know the specifics were not in will, and these mineral rights went through Texas and later the special N Dakota probate. But how do we check out those original records without having to travel from Texas to ND? The miniscule royalty payments we are getting wouldn't cover the cost of an attorney.

Also Brandon, re the formula you mention, the above formula I list above is what the oil company uses-does that seem legit (please note my concerns above.)

Thanks again to all,

Van

5

Van, you have my sympathy but you only get 18% of the revenue of your spaced and producing acres, not of well production. I call it the mathematics of leasing. Each acre may be worth $25k to $50k over a period of 15 to 30 years, but since you leased, your part is only 18% of what is attributed to your acres, before taxes and before operator deductions.

you can't give away 82% in a lease and have alot coming unless you have alot of acres, subtract the 11.5 combined production and severance taxes and your royalty is reduced to an effective 16% before operator deductions, which I don't even want to guess at, they could take another 2.5% off of that 16%.

I think it likely that your net mineral acres is small and not all of your net mineral acres are being used presently. Would you mind posting the legal description from your leases and the number for the net mineral acres you should find on the lease? Your deal is made, nobody is going to be able to step in and change it without you making a new contract. Your lease is most likely recorded at the county recorders office, public record, available to all, but it is a needle in a haystack and I will not be searching for it.

It's not easy dragging information from someone. You say you have 200/320 divided 4 ways = 50/320 X .18 royalty = 9/320. This is probably further reduced 3 more ways, but I can't say without determine the net mineral acres or the well spacing. You can see how the acres have been whittled down from leasing. Consider if you are not expecting too much from so few acres. Also please consider providing the information to actually answer your question. I don't know anyone who can answer your question definitively with the information you have provided. Wish I could help, but I can't with what you have provided.

6

Van & Brandon,

It is nice that Brandon typed all the ways to show the same outcome. His comment about your not being able to own .73 is not quite correct. You can own .73% or as a decimal .0073. From what I read, your siblings have inherited from someone who inherited probably from some other ancestor who once owned 200 acres of surface and mineral rights. Later they sold surface rights and kept mineral rights and by the time you inherited from your parent it was only .00739645 of the 200 acres of minerals. The total area consider to be the well section is 320 acres. You only own a percent of 200 of the 320 drilling section. (If the drilling section had only been 100 acres and it was not located on any of your 200, you would receive zero dollars).

.00739645 x 200 = 1.479291 acres x 18% royalty = .266272 x 320 section area = .000832101

You state you are receiving 18% royalty, in Oklahoma they currently use 16ths example 3/16 royalty and that is why I believe Brandon decided to use .1875 in his calculations.

I hope everyones comments helps you to understand how your royalty is calculated. It appears to be correct to me and a decent royalty percentage especially if there are no expenses for processing or transporting etc.

Sincerely, Deb

Brandon D Pointer said:

Van

Haven't been on here in a while. The formulas are the same. It's still what you own/320 x .1875 no matter if you multiply .73 before or after the division. See below

The numbers from your post(that you got from them)are wrong:

Tract Factor * Mineral Interest * Royalty Interest = NRI

200/320 * 0.739645% * 18% = 0.000832101 NRI. Actually equates to .08636, missing some piece of data to get to.000832

.739645x200= 147/320 x .1875 = .08636

200/320= .625x.739645= .46059x .1875= .08636

From your post: However we don't own 100% of mineral rights-we are four siblings and each of us own a mineral 0.739645% interest in that tract. (or together a total mineral interest % of 4 x 0.739645%)

You each cant own .73, that's more than the whole. Maybe a .73 of a certain amount of acres each.

If the probate was never filed in ND they might be missing something but I doubt it. Whoever probated it(attorney) will send it to you. Request a division order from the purchaser(whoever your checks come from) if you don't have one.

As for the taking oil from other than where they have leased, not happening. That's why it's spaced on 320 acres and any well bore or lateral cant be within a certain distance a the units edge The effects of a well drilled in one section or tract effecting the production of another well in an adjoining section are slim.

Sorry for the rambling post, wish we could give you some hard answers but without all documents and info we are all just hypothesizing

Good luck
7

Hi Brandon, Deb, RW and anyone else who cares to pitch in,

thanks for your replies and thoughtful input. I think your replies are helping me hone into the uncertainties expressed in my questions. And while again I thank each of you for your replies, I am still uncertain regarding my main concerns. I think maybe I was so wordy, my specific questions got lost in all my words. :)

But to be brief, here are my two questions:

1. thanks for confirming my understanding of calculating the NRI-that wasn't so difficult or my main concern. My main concern was how that figure is used to calculate the actual royalty check amount. I understand how tract share and mineral % interest significantly reduces the percentage of ownership and actual royalty amounts. But assuming the calculations are done as I stated and you all confirmed (where tract factor and mineral interest are applied against the royalty percentage), then I assume that that figure should then be multiplied against the total production for that given whole tract in terms of volume or dollar value-that is those reducing factors should not be applied or reduced twice. Is that correct? Do you understand what I am saying? Otherwise the reducing numbers are being applied twice which would be incorrect and lower the amounts due far more than is appropriate. (it's late and I hope I am making sense.)

2. My other concern was whether if the oil company could drill and extract from one tract but also pull oil from an adjacent tract that they are not paying for-ie assuming that the underground oil pool is under both portions of land? Is that possible-could they be cheating that way? I understood you to say they couldn't do that Brandon -please help me understand why they wouldn't likely do that if the pool of oil was under both tracts?

Also RW mentioned something about the Pugh clause. What is that and how do I know if we have that in our contract?

If you all or anyone are able to give me clear answers to resolve my concerns soon, it would be greatly appreciated. My siblings and I have been holding our royalty checks for over three months in order to resolve concerns before depositing them. Since we have signed I have heard from more than one source how you really have to know what you are doing or you could be taken advantage of.

Thanks again, God bless,

Van

8

What kind of results do you get when you use a Royalty calculator?

Google Search for Oil Royalty Calculator

You could also download a Royalty Calculator done with a spreadsheet if you prefer to easily inspect the formulas - math used.

Van M said:

Hi Brandon, Deb, RW and anyone else who cares to pitch in,

thanks for your replies and thoughtful input. I think your replies are helping me hone into the uncertainties expressed in my questions. And while again I thank each of you for your replies, I am still uncertain regarding my main concerns. I think maybe I was so wordy, my specific questions got lost in all my words. :)

But to be brief, here are my two questions:

1. thanks for confirming my understanding of calculating the NRI-that wasn't so difficult or my main concern. My main concern was how that figure is used to calculate the actual royalty check amount. I understand how tract share and mineral % interest significantly reduces the percentage of ownership and actual royalty amounts. But assuming the calculations are done as I stated and you all confirmed (where tract factor and mineral interest are applied against the royalty percentage), then I assume that that figure should then be multiplied against the total production for that given whole tract in terms of volume or dollar value-that is those reducing factors should not be applied or reduced twice. Is that correct? Do you understand what I am saying? Otherwise the reducing numbers are being applied twice which would be incorrect and lower the amounts due far more than is appropriate. (it's late and I hope I am making sense.)

9

Hi i too am brand new here. Ijust received a blank copy of a lease on some property in Garvin county in oklahoma.

I, after reading some of the disscusions here asked how they calculate the royalties. He said they take my property divide by 640 times the revenue times the royalty.

I am dealing with a Mr.Fricke in Oklahoma city for Easton Enterprises.

Any body know of them? Also dont know if this is a fair lease. Can e-mail if you can help.

Am over my head Thanks Phillip Love

10

David,

Thanks for your response.

I am a novice at this. What is a royalty calculator? The math isn't that hard. It's just a question of whether -per my questions- the oil company is dealing fair-and-square.

So again, if you or anyone could answer those questions, it would be a big help.

Thanks, blessings,

David said:

What kind of results do you get when you use a Royalty calculator?

Google Search for Oil Royalty Calculator

You could also download a Royalty Calculator done with a spreadsheet if you prefer to easily inspect the formulas - math used.

Van M said:

Hi Brandon, Deb, RW and anyone else who cares to pitch in,

thanks for your replies and thoughtful input. I think your replies are helping me hone into the uncertainties expressed in my questions. And while again I thank each of you for your replies, I am still uncertain regarding my main concerns. I think maybe I was so wordy, my specific questions got lost in all my words. :)

But to be brief, here are my two questions:

1. thanks for confirming my understanding of calculating the NRI-that wasn't so difficult or my main concern. My main concern was how that figure is used to calculate the actual royalty check amount. I understand how tract share and mineral % interest significantly reduces the percentage of ownership and actual royalty amounts. But assuming the calculations are done as I stated and you all confirmed (where tract factor and mineral interest are applied against the royalty percentage), then I assume that that figure should then be multiplied against the total production for that given whole tract in terms of volume or dollar value-that is those reducing factors should not be applied or reduced twice. Is that correct? Do you understand what I am saying? Otherwise the reducing numbers are being applied twice which would be incorrect and lower the amounts due far more than is appropriate. (it's late and I hope I am making sense.)

11

Phillip,

You can send me a friend request and we can exchange an email. I can look at it as a layman in as to "what I would do if I were in your shoes". If nothing else I may be able to point you to some changes you should see a profession about.
Too often mineral rights owners are too quick to lease without consulting professional help, independent landmen, oil and gas attorneys, mineral rights managers, and or consultants. The cost is relatively cheap compared to the potential loss.

I don’t want to put down Van at all but he admitting they were novices when things were leased, and now his concerns are very valid. I’m afraid this is “common” instead of the exceptions. In his case it is likely too late in the game to make a difference. Even on the very outside chance something could get fixed or changed, it would cost many times over in legal fees. In your case you have not committed to the lease. Time is on your side. Don’t let anyone pressure you into signing something you do not understand or have reviewed by someone that does.

12

Van,

In response to your above questions

1) The simple version, they multiply the dollar amount of the product sold x 0.000832101. Then deduct the taxes. In some cases they will deduct other charges depending on the State and your lease. Yes that “reducing factor” as you call it is only done once. The check stub will show the results. Marketing costs if applied with be based on your percentage also.

2) This is going to be state dependent. It is also dependent on many more factors including the type of formation that contains the oil. Most states have laws in force to prevent them from taking your product. But it is possible that a well can produce some product from under a formation that would allow the product to seep from outside the target area into the target area. There are tons of articles and books on it and each state has some differences on how that is controlled or attempted to be controlled.

If you didn’t ask for a Pugh clause it is unlikely you have one. You’ll need to search on Pugh clauses and compare the language.

I seriously doubt depositing the royalty checks makes a difference in what you have already signed, but consult with an oil and gas attorney if you have doubts. The signatures on the lease is what bound you to the contracts, I’m assuming you already cashed the checks from the lease also. You may have even signed division orders before they would send you the checks. I can’t see how the checks would make a difference, but I’m not a professional.

The royalty calculator simply does the math for you by plugging the numbers into the form.
Good Luck!

13

Hi All,

It seems that I am not alone with my questions... I inherited 80 acres in Weld Co, Colorado and it is leased at 1/8 royalties. (I can't find any mention of any clauses or other hidden costs in the Lease. What kinds of terms should I be looking for? ) There have been several companies who have contacted me about buying my Mineral Rights. Currently, there are no wells in production on the property, so no royalty checks. But the general area is very active with speculators. Are there some guidelines you could offer to help me understand what my potential royalties (ie how does 1/8 equate to actual dollars?) might be? I know there is no way to predict output, but I'm trying to figure out whether it makes more sense to sell my mineral rights or wait for royalties.

I hope someone on this group can help me. Thanks, GT

14

Gina, you would probably get more response if you started your own thread. If you give a legal description, township , Range and section people would be able to give you more accurate help. You should also post your question to the Weld county group.

Gina Thomas said:

Hi All,

It seems that I am not alone with my questions... I inherited 80 acres in Weld Co, Colorado and it is leased at 1/8 royalties. (I can't find any mention of any clauses or other hidden costs in the Lease. What kinds of terms should I be looking for? ) There have been several companies who have contacted me about buying my Mineral Rights. Currently, there are no wells in production on the property, so no royalty checks. But the general area is very active with speculators. Are there some guidelines you could offer to help me understand what my potential royalties (ie how does 1/8 equate to actual dollars?) might be? I know there is no way to predict output, but I'm trying to figure out whether it makes more sense to sell my mineral rights or wait for royalties.

I hope someone on this group can help me. Thanks, GT

15

Thanks RW, will do! It's great there are specific groups for specific areas.
gt

r w kennedy said:

Gina, you would probably get more response if you started your own thread. If you give a legal description, township , Range and section people would be able to give you more accurate help. You should also post your question to the Weld county group.

Gina Thomas said:

Hi All,

It seems that I am not alone with my questions... I inherited 80 acres in Weld Co, Colorado and it is leased at 1/8 royalties. (I can't find any mention of any clauses or other hidden costs in the Lease. What kinds of terms should I be looking for? ) There have been several companies who have contacted me about buying my Mineral Rights. Currently, there are no wells in production on the property, so no royalty checks. But the general area is very active with speculators. Are there some guidelines you could offer to help me understand what my potential royalties (ie how does 1/8 equate to actual dollars?) might be? I know there is no way to predict output, but I'm trying to figure out whether it makes more sense to sell my mineral rights or wait for royalties.

I hope someone on this group can help me. Thanks, GT

16

Van M said:

David,

Thanks for your response.

I am a novice at this. What is a royalty calculator?

Rick Howell answered on page 2 of this discussion.

_______________________________________________________

Van M said:

The math isn't that hard.

I agree that the math is quite easy, but you didn't show any math in your most recent post and that makes me (and perhaps others) unsure what you are asking exactly. If you don't want to reveal your exact acreage in the unit, then scale it to another number of acres and then resize it to the actual amount of acres after the discussion has concluded.

If you don't wish to discuss numbers (theoretical or real) with us, then use a Royalty Calculator and see the results that it gives you. I suggested a Royalty Calculator since the discussion was straying towards verbiage and away from numbers - calculations.

_______________________________________________________


Van M said:

It's just a question of whether -per my questions- the oil company is dealing fair-and-square.

You had similar questions earlier in this discussion thread.

3. How do we know that the mineral interest % they claim is accurate. The current company claims the original company had their attorney determine the amount and that the only way we could verify it would be to hire our own attorney to do so. So my third question is whether these companies might try to cheat in calculating the % since they are hiring their own attorney's to do so-and apparently little or no accountability. I realize the state of ND has theoretical oversight, but I can't imagine their verifying every tract and least. IE How do we know they are using the correct and rightful mineral interest %?

But how do we check out those original records without having to travel from Texas to ND? The miniscule royalty payments we are getting wouldn't cover the cost of an attorney.

It appears that you and your siblings will have to live with what the oil company has determined as the mineral interest for you and your siblings until you can provide legal documentation showing otherwise. I have no idea what the cost would be to have a landman and/or a lawyer pull the records in North Dakota and determine if the calculations from the oil company are correct, but you and your siblings need to decide to Ante Up and pay that cost or live with what the oil company has calculated.

Until you provide documentation that casts doubt on the calculations used by the oil company, they have no incentive to have their lawyers and/or landmen pull the records again and recalculate the numbers.

17

Thanks to all who took time to reply. I appreciate your helpful answers! God bless

David said:

Van M said:

David,

Thanks for your response.

I am a novice at this. What is a royalty calculator?

Rick Howell answered on page 2 of this discussion.

_______________________________________________________

Van M said:

The math isn't that hard.

I agree that the math is quite easy, but you didn't show any math in your most recent post and that makes me (and perhaps others) unsure what you are asking exactly. If you don't want to reveal your exact acreage in the unit, then scale it to another number of acres and then resize it to the actual amount of acres after the discussion has concluded.

If you don't wish to discuss numbers (theoretical or real) with us, then use a Royalty Calculator and see the results that it gives you. I suggested a Royalty Calculator since the discussion was straying towards verbiage and away from numbers - calculations.

_______________________________________________________


Van M said:

It's just a question of whether -per my questions- the oil company is dealing fair-and-square.

You had similar questions earlier in this discussion thread.

3. How do we know that the mineral interest % they claim is accurate. The current company claims the original company had their attorney determine the amount and that the only way we could verify it would be to hire our own attorney to do so. So my third question is whether these companies might try to cheat in calculating the % since they are hiring their own attorney's to do so-and apparently little or no accountability. I realize the state of ND has theoretical oversight, but I can't imagine their verifying every tract and least. IE How do we know they are using the correct and rightful mineral interest %?

But how do we check out those original records without having to travel from Texas to ND? The miniscule royalty payments we are getting wouldn't cover the cost of an attorney.

It appears that you and your siblings will have to live with what the oil company has determined as the mineral interest for you and your siblings until you can provide legal documentation showing otherwise. I have no idea what the cost would be to have a landman and/or a lawyer pull the records in North Dakota and determine if the calculations from the oil company are correct, but you and your siblings need to decide to Ante Up and pay that cost or live with what the oil company has calculated.

Until you provide documentation that casts doubt on the calculations used by the oil company, they have no incentive to have their lawyers and/or landmen pull the records again and recalculate the numbers.